International Poverty Comparisons: What Do They Tell Us about Causes?

September 8th, 2012 at 5:53 pm

I’m thinking about the causes of poverty for an upcoming debate and in that context I often reflect on this chart.

The American debate on the causes of poverty places significant weight on the behavior of the poor, behavior that’s juiced up—in a bad way—by safety net programs. For example, the argument goes, anti-poverty programs that provide cash or nutritional (near-cash) benefits to poor peeps leads them to work less and thus leads to higher poverty rates than would otherwise prevail.

I deal with the work disincentive claim in great detail here—not much to it (as usual, pure supply-side explanations don’t explain much). Relatedly, there’s the set of cultural critiques associated with Charles Murray, e.g., the poor aren’t industrious enough, they lack the middle-class aspirations, and so on.

I think the international evidence is instructive in this regard.

The figure shows pre-transfer and post-transfer poverty rates among OECD countries (mostly the advanced economies). The former (pre-transfer) are the market-driven poverty rates, before the tax and transfer systems kick in.

Though there is variation across countries on the pre-transfer, or market poverty rates, they’re fairly close, and their average, excluding the US, happens to be the same as ours. After the tax and transfer system kicks in, however, the US has the highest poverty rate of all the countries in the sample. Our post-transfer poverty rate is 1.7 times that of the non-US average (17.1%/9.8%).

Now, there are as many different models for dealing with poverty and as many different cultural and religious proclivities as there are countries. But they all generate roughly similar shares of market poverty.

That suggests that what determines poverty differences across countries may not have much to do with the poor themselves or the disincentive effects of the safety net. And what determines the post-tax and transfer rates are of course, the taxes and transfers.

Obviously, poverty is a complex and multifaceted phenomenon. And no question, people engage in behaviors that contribute to their poverty. But simplistic explanations that largely implicate the poor themselves are woefully incomplete.

More to come on this topic.

Source: OECD, *Poverty thresholds: 50% of median income.

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Problem is rational people see them and say, “The American system does not generate fewer poor people” but irrational people see them and say, “See, if we got rid of government, we’d generate fewer poor people.” You might think we could dissuade the irrational by trying this, by eliminating government, but even then they’d find some reason to keep to their irrational beliefs.

Thank you. I think transfers continue to play an important role in reducing poverty in the OECD area but employment (as near to full employment as possible) and access to improvement in education and skills represent the best way of reducing poverty. Regds.

– making an international comparison based on data that defines poverty as 50% of median income doesn’t allow us to take into account differing national income levels. It would be interesting to see a comparison that is either normalized to per capita income by country or based on some other poverty measure more closely related to actual purchasing power.

– if I understand correctly you seem to be saying that the relative similarity of market-poverty across different countries shows that the poor are not the principal cause of their own low incomes. Couldn’t you use the same data to argue in a different direction – that whatever differences in “cultural and religious proclivities” exist across these countries, those differences seem to have little influence on actual human behavior as it relates to the causes of poverty. Whether this is true or not I don’t know… I just think that your argument needs more supporting evidence than what you have shown here.

– Although your argument is predicated on the similarity of market poverty levels across countries, I was actually struck by the variation – a factor of almost 2:1. I think before you try to draw conclusions based on the similarity, it would be helpful to understand more clearly what it is that makes, for example, Finland, Spain and Switzerland so much better than their peers.

– While I certainly agree that “simplistic explanations that largely implicate the poor themselves” are incomplete, we have to be equally cautious about adopting simplistic and incomplete arguments in the other direction.

The most disturbing fact offered by this chart is that “market driven” economies absent government intervention through transfer payments leave more than 25% of participants in poverty. Why is this the case? Is capitalism such a flawed system/structure as to leave one in four participants in poverty? Forget the remedial efforts by governments to mitigate poverty conditions, what is the current thought on how to improve the system/structure so that we drive 25% close to 0%?

[…] government programs reduced poverty by 10.9 percent, or 33.6 million people. This is borne out in cross-country comparisons that show the main difference (pdf) between developed countries’ high and low poverty rates […]